MONTPELIER — After negotiations that representatives of both the city and state acknowledged were challenging, the city has agreed to contribute $408,000 toward the $3.3 million projected cost overrun for the $20 million wood chip heating plant that will serve both the state office complex and downtown Montpelier.

“The good news is that there is no immediate budget impact to the city moving forwards,” said City Manager William Fraser. “It was somewhat frustrating, but in the end we reached a fair way of dealing with the problem. Anything can happen with a construction project.”

The state had sought more than $600,000 toward the cost overrun. The city refused to pay, arguing that it was the state’s responsibility to budget, design, construct and operate the plant, with the city being responsible solely for the distribution system.

The $408,000 the city finally agreed to contribute represents the cost of the thermal conversion unit, known as the “city room.”

The money to pay the bill will be generated in two ways. Should there be leftover money in the budget at the end of the project, the city will pay at least 50 percent of the surplus toward the bill. Any remaining unpaid balance will come out of revenues generated by future profits from the plant.

The project ran into problems after initial estimates for its cost shot up after the state budget process. It has been lauded as an example of how federal, state and local governments can work together to both promote clean energy and reduce heating costs.

“One of the things that I am learning is that each project that we undertake has never been done before,” said state Buildings and General Services Commissioner Michael Obuchowski. “You can bake a batch of chocolate chip cookies, but each one has its own shape and form. These construction projects each have their own shape and form.”